Fiscal reality in Philadelphia

WHEN MICHAEL Nutter becomes mayor, he will face a fiscal catch-22: a seemingly rosy short term with a nearly $300 million fund balance, and a series of long-term fiscal challenges that could undermine his opportunities to implement meaningful change.

First, he must produce a five-year plan within three months and faces contract negotiations with all of the city's unions within six months. Time will be short, the task daunting and the consequences enormous.

In 2006, PICA released a report detailing the financial challenges facing the next mayor. Each of them remains, and some have gotten far worse.

The fund balance, the amount of cash the city has on hand, is still projected to drop precipitously, even without any provision for wage increases in new union contracts.

Pension payments continue to grow and are projected to be nearly half a billion dollars by fiscal year 2010 while at the same time the pension fund itself is barely half-funded. Recent medical awards increased costs by more than $160 million over the next five years. By 2012, health insurance and pension costs combined are projected to exceed $1 billion, consuming one out of every four general-fund dollars.

As we continue to pay out more in benefits at a faster rate than we take in money, the city has been hobbled in its attempts to make crucial investments, improve services and cut taxes. Surveys show that satisfaction with government services has decreased in all but one year since 2002.

The city cannot borrow its way out of these problems. Long-term debt has dramatically increased - by 2009, debt service will be $85 million higher than they were in 2001. Despite this increase, the city has gone eight years without investing even half of the recommended amount in its infrastructure, which means buildings and facilities will continue to deteriorate.

THE TAX STRUCTURE continues to put the city at a competitive disadvantage, though the gap has closed thanks to the longest annual wage- and business-tax reduction program in the country.

But the approved plan would end the business-tax reduction program in 2010, which would send the damaging message that reducing the cost of doing business here is no longer as high a priority of city government.

The Philadelphia Gas Works has repaid half of its $45 million loan, but the Pennsylvania Utility Commission granted only a quarter of PGW's requested rate increase, making it much harder for company managers to make the changes needed for long-term stability.

The prison census and related costs are growing dramatically, with few initiatives enacted to slow the growth. Despite increased city support and investments from the state, the School District faces persistent financial problems that may lead it to seek additional city funding.

Finally, the city hasn't established an emergency "rainy day fund," leaving it with no fallback in case of an unexpected crisis.

So should we throw up our hands and do nothing? Hardly. There are solutions. They include:

* Hiring a full-time employee dedicated to managing health insurance programs, controlling management costs and focusing on healthy behavior.

* Using operating dollars to invest in city infrastructure - particularly during years when the fund balance exceeds projections.

* Issuing a comprehensive debt policy - the current one hasn't been updated since 1995.

* Continuing the business-tax-reduction program along with the ongoing wage-tax reduction.

* Establishing a rainy day fund.

You can find more ideas like this in a newly released PICA report.

The bottom line: ensuring the fiscal health of the city in a manner that meets the needs of the citizens, employees and businesses of Philadelphia will require the contributions and ingenuity of all.

We at PICA look forward to assisting in these efforts. *

Jim Eisenhower is chairman of the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's financial practices.

A full copy of the PICA report can be found at www.picapa.org.